Chapter 7 - Inventory

Question 1

1. When should inventory (stock) takes occur?
2. What happens if the stock take is done late or ealy?

Answer 1

1. At the end of the accounting period
2. The figures will need to be adjusted to for the movements in inventory between the period end and stock take date.

Question 2

In the SFP what inventory value should be recorded?

Answer 2

The lower value out of…

1. Cost → (all expenditure incurred to aquire the product or service at present location and condition)
2. Net realisable value (NRV) → expected revenue to be earned when goods are sold - any sellling costs / modification costs

Question 3

What is the value of closing inventory for the following business?

Answer 3

• X → cost is lower at £7 (7 @ 100 = 700)
• Y → NRV is lower at £8 (8 @ 200 = 1600)
• Z → NRV is lower at 15 (15 @ 300 = 4500)
• £700 + £1600 + £4500 = £6800

Question 4

For the following what would the inventory figure be in the SFP?

(In the pre calculated closing inventory they deducted cost of goods each time)

Answer 4

1. Cost = £65,000 NRV = £52,000 (£60,000 -£80000)

NRV is smaller → calculate difference = £13,000

2. Cost = £6000 (£60 x 100) NRV = £5500 (100(£70 - £13 - £2))

NRV is smaller → calculate difference = £500

• £400,000 - £13,000 - £500 = £386500

(if cost is smaller no duduction needed as it has already een asummed in pre calculated inventory)

Question 5

When the price of inventory has changed throughout the year how is the end cost determined?

(5 methods only 2 in exam)

Answer 5

• FIFO _{<em>(first in first out)</em>} → this assumed that the first goods purchased are the first to be sold.
• AVCO → the weighted average price for allunits in inventory. (A new weighted average must be purchased after every purchase)

Question 6

1. Use the FIFO method to calculate the units of the closing inventory of the folowing…
2. Using this answer calculate the closing inventory value

Answer 6

1. 100 + 1700 - 1340 = 460
2. (250 x £1.80 = £450) (210 x £1.74 = £369.60)

£450 + £369.50 = £819.60

Question 7

Use the AVCO method to calculate the value of the closing inventory of the folowing…

Answer 7

Question 8

If a business owner takes inventory for their own personal use how is it recorded?

Answer 8

As a drawing at the cost price of the inventory (not sale pricew as no profit)

• Dr Drawings (cost of inventory taken)
• Cr purchase (cost of inventory taken)

Question 9

Often businesses price thei inventory at a price to earn a specific grossprofit margin.

What 2 way are these costs structured to determine gross pofit?

Answer 9

1. Mark up cost → cost is deemed to be 100% therefore sales exceeds 100%
2. Margin on sales → sales is deemed to be 100% so therefore cost is bellow 100%

Question 10

• A business made sales of £4000 during the year with gross profit margins of 25%.
• What was the cost of the goods sold and gross profit?

Answer 10

Question 11

• A business purchased £2500 of goods and sold them at mark up of 40%
• What was the sales and gross profit?

Answer 11

Question 12

Answer 12